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Microeconomics Chapters 1-4

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ECN 104
Thomas Barbiero

Microeconomics Chapter 1 -Microeconomics is a methodology; it's a way of looking at the world. -Economics is the science of scarcity and choice. -There is an economic problem when people have desires and there is something limited. -Individuals want to maximize happiness. -Other-Things-Equal Assumption means everything is held constant. -Microeconomics examines individual units (household, firm or industry) and their decision making process. -Macroeconomics examines the whole economy: national output of G and S (GDP) and the subdivisions or aggregates: unemployment, inflation. -Positive statements are based upon facts & cause-and-effect relationships. There are no value judgments. -Normative statements are based upon subjective beliefs. -What is needed to produce G and S: Property Resources: Land-natural resources, Capital- manufacturing aids to produce G and S: factory, storages, machines. Human Resources: Labor- physical and mental talents of individuals used in producing G and S. Entrepreneurial Ability- takes initiative, makes policy decisions, innovates, and bares risk. -The Production Possibilities Model Assumptions: full employment and productive efficiency, fixed resources (factors of production), fixed technology, two goods. -Opportunity Cost is the sum of all that is lost by taking one course of action over another. -The law of increasing opportunity cost: shape of the curve is concave to the origin. Economic explanation: resources-factors of production-are not completely adaptable to alternative uses, thus you need to give up the production of one input in order to increase the other input. -Decide on optimal allocation of resources by comparing Marginal (extra) Cost (MC) to Marginal Benefit (MB). Marginal Benefit is the extra benefit associated with consuming one more unit. Marginal Cost is the extra cost of the extra unit. Want to have MC=MB. -We want a growing economy. To do so we must increase in factor supplies (more land ,labor, capital and entrepreneurial activity), advance in technology. -Countries that produce more goods tend to grow faster. A company that invests in future goods will grow faster. -Individual nations are limited by the PPC. But not when there is international specialization and trade! -Products provided for “free” to an individual are not free for society because of the required use of scarce resources to produce them. Companies provide “free” goods as a marketing strategy to promote brand awareness. Products that are promoted as “free” to the individual may actually be bundled with another good for which the consumer must pay. Because a purchase is required to obtain them, these products are not really free to the buyer. -The increase of women in the workforce has lead to the shifting of the PPC outward. More women because of increase in women wage rate, greater access to jobs. -Post hoc fallacy: when two events occur in time sequence the first event is not necessarily the cause of the second. -Correlation vs causation: events may be related without a casual relationship. Chapter 2 -Economic system: A particular set of institutional arrangements and a coordinating mechanism. -The command system: also known as socialism or communism. Government owns most of the property resources and economic decisions occur through a central economic plan. -Market system key characteristics: Private property: can enjoy it and dispose of it as one sees fit. Freedom of enterprise and choice: enterprise (businesses can buy and sell as they choose) & choice (owners can use or sell property as they choose, workers can work where they like and consumers can buy what they want). Self interest: is what interests one. Businesses seek profits. Consumers seek value. Competition: independently acting sellers and buyers- no single buyer or producer controls the market. Easy entry and exit. Markets and Prices: prices signal scarcity and guide resource allocation. Other characteristics: Technology and capital goods (advances technology and capital goods promote efficiency and output). Specialization (division of labour, ability differences, learning by doing, save time switching tasks, geographic specialization). Use of money: it is a medium of exchange (money substitutes for barter, which requires a double coincidence of wants). Active, but limited government: although the market system promotes efficiency, it has certain shortcomings such as the over production of goods with social costs such as pollution. -Five Fundamental Questions: 1.What will be produced? Those goods and services that can be produced at a profit- businesses must respond to consumers’ (individuals, other businesses, and the government) wants and it desires to make profits. It is what consumers vote for with their dollars (consumer sovereignty). Market restraints on freedom- Businesses are not free to produce what they want must match their production choices with consumer choices or they will face losses and eventual bankruptcy. 2.How will the goods and services be produced? The goods and services will be produced in the most efficient and least costly method. 3.Who will get the goods and services? Those with the greatest willingness and ability to pay. 4.How will the system accommodate change? By responding to price and profit signals. Markets are dynamic- what is efficient today may not be efficient tomorrow as tastes, technology, and resource supplies change(price help signal those changes). 5.How will the system promote progress? Technological advance. Creative destruction occurs when new products and production methods destroy the market positions of firms that are not willing or able to adjust. Capital accumulation- which helps to finance technological change. -The “Invisible” Hand: Prices communicate information about scarcity and value. Markets bring
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